This line item should be
eliminated with the rest of the department. Savings: $4,054,700. Governor
Granholm’s 2005 proposal decreases the gross appropriation to $2,632,400.

Program: Job creation services

Appropriation:

Interdepartmental Grants:

$100,900

Federal Funds:

$2,953,300

Special Revenue Funds:

$903,100

GF/GP:

$15,735,700

Total:

$19,693,000

Program Description:

This appropriation funds the work of full-time employees
who support the work associated with MEDC programs. These programs include, for
example, Travel Michigan, E-MEDC, the MEDC’s public affairs office, and the
Michigan Economic Growth Authority, to name a few. The following is a
description of each of the four most notable programs supported by the
job-creation services appropriation.

Recommended Action:

These functions should be eliminated with the rest of the
department.

Travel Michigan: Travel Michigan helps the Michigan
Travel Commission by marketing the state as a destination for tourists.
According to its web site, it also maintains a telephone service that the public
can call to get information about traveling in Michigan. The marketing services
of this group should be left to private groups such as businesses and their
trade representatives.

E-MEDC: This section is described in House Fiscal
Agency documents as coordinating "information technology and e-business efforts;
customer assistance and customer advocacy units; export services and ombudsman
office." According to officials at the E-MEDC office, information technology
and e-business efforts include internal web support to MEDC staff and Michigan
"Careersite" operations. The MEDC’s creation and maintenance of Careersite is
an example of a state agency that uses state funds to compete directly with
private, for-profit, taxpaying businesses.

It also underscores the fact that Michigan state government
is now so big and bewildering that it competes against itself. Consider the
case of "Careersite," operated by the MEDC, and "Michigan Talent Bank," operated
by the Michigan Department of Career Development (MDCD). Each agency carries out
the same function — bringing job seekers and job providers together — and
competes not just with each other, but also with hundreds of private,
Michigan-based job recruitment companies.

Why does the state run these redundant websites? According
to the MEDC, Michigan Careersite was created to help attract "skilled workers in
Information Technology, Life Sciences, and Advanced Manufacturing." The MDCD
says its Michigan Talent Bank is intended to "bring employers and employees
together," but since it does not exclude skilled workers from any field, the two
sites end up performing overlapping duties. In addition, an MEDC brochure about
Michigan Careersite boasts of its ability to "grab" jobs posted on Michigan’s
Talent Bank and move them to its own.

Private recruitment companies have long helped employers
find qualified workers to fill jobs. During the 1990s, Michigan alone saw 348
new human resource firms spring up to fill this role. Michigan also is home to
many privately run labor exchange web sites, such as Careermatrix.com. Its
founder, Dennis Hoyle, is not thrilled with the state’s involvement in his
business: "It really is irksome to see the state using our tax dollars to
compete against us," he said. "Moreover, it’s bizarre watching the agencies
competing against each other. There really isn’t much difference between the two
sites."

Unfair competition from the state is all the more striking
given then-Gov. Engler’s comment in November 1999: "Tax policy is best which is
simple and uniform, and which treats similarly situated activities in the same
manner." There is nothing fair about subsidized state agencies paying zero taxes
while competing with private, for-profit, taxpaying firms.

Additionally, a number of general web sites in the state,
such as mlive.com, operate labor exchanges, and many online newspapers post
their want ads electronically. There are over 6,000 web sites specifically
dedicated to job recruitment nationwide, and most of these private organizations
do their work without costing the taxpayer a cent. Meanwhile, the MEDC is
spending about $500,000 taxpayer dollars per year to operate Michigan Careersite
for its first two years. The MDCD does not know what it costs to operate the
Michigan Talent Bank.
[3]

Michigan Economic Growth Authority: In April 1995,
the state created the Michigan Economic Growth Authority (MEGA), an agency
empowered to issue tax credits to companies that promise to expand in or
relocate to, Michigan.

No company should be blamed for accepting a legal tax
credit when it is offered, just as no individual should be faulted for taking a
credit on his personal income tax form. But what makes these discriminatory
MEGA credits problematic is that they are both unnecessary and unfair.
Businesses — and the economy generally — would be better off with a fair field
and no favor, a climate of lower tax burdens for all and discriminatory
treatment for none. To date MEGA officials, working in concert with the MEDC,
have arranged for companies to receive as much as $2 billion in tax credits,
abatements and job training subsidies. For more on this subject see the
Mackinac Center for Public Policy web module on economic development at http://www.mackinac.org/ecodevo.
Savings: $19,693,000. Governor Granholm’s 2005 proposal increases the gross
appropriation to $19,793,200.

Program: Michigan promotion
program

Appropriation:

All from GF/GP:

$5,717,500

Total:

$5,717,500

Program Description:

This appropriation funds the Michigan Promotion Program.
This program is designed to market Michigan as a destination choice for
tourists. The funding helps create and distribute publications, such as
"Michigan Travel Ideas," that tout the Great Lakes State as a great place to
visit. Another example of marketing funded by this line item involves the
so-called, "Warm Weather Media" campaign of fiscal year 2002. This was a $4
million advertising initiative targeted to people in Chicago, Indianapolis,
Cleveland, and Green Bay, to encourage them to think about Michigan as a summer
destination.
[4]

Recommended Action:

The Michigan Promotion Program should be eliminated with
the rest of the MEDC. There are at least three compelling reasons for ceasing
this operation. First, it is unnecessary. Thousands of Michigan businesses
have every incentive to encourage tourism in Michigan on their own, or by using
their respective industry associations. The Tourism Industry Coalition of
Michigan, which exists to increase awareness of tourism in the Great Lakes
State; the West Michigan Tourist Association, which does the same for the west
side of Michigan; and the Travel Industry of America are all good examples.
Second, it is unfair. Thousands of Michigan businesses derive no direct benefit
from tourism yet are taxed to pay for the benefits of advertising for those who
do. Third, there is no empirical evidence to prove that this program delivers
more tourism to Michigan than would have occurred if central planners simply
left tourism to the private sector.

During fiscal year 2002 this line item funded $100,000 in
advertising for the for-profit company Cabela’s Retail, Inc. Cabela’s is a
mammoth catalog and retail outlet for everything related to outfitting outdoor
sports enthusiasts. It ships over 60 million catalogs to every state and 120
countries every year and maintains seven retail outlets. The MEDC arranged for
Cabela’s to receive millions in financial incentives in exchange for opening a
200,000-square-foot store in Dundee, Mich.
[5] Cabela’s accepted the state’s
offer and opened its Dundee store in October, 2000. One component of the
incentive package was subsidized advertising. The MEDC also arranged for
Cabela’s to get other promotional assistance, including:

$300,000 in catalog advertising
from Cabela’s Retail, Inc. over a three-year period;

One full-page ad in the state’s
tourism publication, "Michigan Travel Ideas," to Cabela’s ($100,000 in value);

Full access to the state’s "Travel
Michigan" database, which contains the names and addresses of over a million
people seeking information about travel in Michigan ($80,000 in value);

Free marketing and publicity
assistance surrounding the official grand opening ceremony of Cabela’s in
Dundee ($25,000 in value);

Cabela’s "free" membership in the state’s "Circle
Michigan" tour promotional organization ($4,500 in value). Circle Michigan is
a private association that works with bus operators to help increase tours for
groups to attend trade shows and other special events.

Businesses and trade groups should do their own marketing.
There is no reason for the state to reach into the pockets of small and
medium-sized sports retailers (there are more than 1,000 in Michigan) to
subsidize the operations of the state’s biggest sports retailer. (For more on
Cabela’s Retail, Inc., and the MEDC see subsequent reference below, and the
article, "A Tale of Two Sporting Goods Stores," in the Summer 2002 edition of
Michigan Privatization Report.
[6]Savings: $5,717,500. Governor Granholm’s
2005 proposal leaves this appropriation unchanged over the previous year’s
budget.

Program: Economic development
job training grants

Appropriation:

All from GF/GP:

$10,048,000

Total:

$10,048,000

Program Description:

This appropriation funds job training grants to firms
that MEDC officials believe are worthy of special job training assistance.

Program Recommendation:

Businesses have always been able
to train employees to suit their needs. When state officials grant subsidies to
one company to train employees they often put their in- or out-of-state rivals
at a competitive disadvantage.

Consider one example first
highlighted by the Mackinac Center for Public Policy in 2000. Boar’s
Head Provision Company is a meat products company headquartered in Brooklyn,
N.Y. In exchange for that company’s promise to invest $14 million and create
450 new jobs in Michigan, the Michigan Jobs Commission arranged in 1998 to give
Boar’s Head an "economic development package" worth up to $5.1 million in
federal, state and local resources — including up to $450,000 in economic
development job training grants. Armed with these incentives, the company
opened a processing plant near Holland, Mich., on Dec. 13, 1999.

The Michigan Jobs Commission, now the MEDC, counted 450
"new" jobs as the agency’s contribution to the Michigan economy through the
Boar’s Head deal. What the agency’s self-serving pronouncements do not state is
the impact of the deal on other Michigan businesses, such as Koegel Meats, Inc.,
in Flint.

Like Boar’s Head, Koegel makes meat products. A
Michigan-based family business for three generations, Koegel produces an
extensive line of cold cuts and the popular "Koegel’s Vienna Frankfurters" that
are grilled by the millions in Michigan back yards every summer. The company’s
meat products still use recipes devised by Albert Koegel when he emigrated from
Germany to Michigan and started the company in 1916. The firm sells 99 percent
of its product in Michigan and employs 110 people at its Flint facility.

Al Koegel, son of the founder, is not one to make a big
fuss about unfair competition. Like his father before him and his son John who
will carry on after him, Al would rather run the business than spend time
lobbying politicians. He cannot help but point out when asked, however, that
for all of its 84 years, Koegel Meats always paid its taxes and never took a
dime of taxpayer money: no abatements, no subsidies. The company always trained
its own employees with its own funds, and continues to do so to this day.

Such targeted assistance may be called "economic
development" by government officials, but, it is more likely just another
example of robbing Peter to pay Paul.
[7]Savings: $10,048,000. Governor
Granholm’s 2005 proposal leaves this appropriation unchanged over the previous
year’s budget.

Program: Life Sciences Corridor
Initiative

Appropriation:

Special Revenue Funds:

$10,000,000

GF/GP

$5,000,000

Total:

$15,000,000

Program Description:

This appropriation funds the Life Sciences Corridor
Initiative (LCSI). This initiative is funded solely through money obtained
though tobacco settlement proceeds. By 1998, 40 states sued tobacco companies
under a variety of legal theories. One of the dominant theories is that tobacco
companies are responsible for large health costs borne by the state for
smoking-related illnesses.

The LSCI was created in 1999 to
help facilitate the growth of biotech firms in the state of Michigan. There are
at least 45 LSCI-type programs sponsored by units of government around the
country, and many of these are funded through the $8.5 billion state tobacco
settlement money. Michigan’s program is effectively corporate welfare for a
specific industry. Consider just two of the grants issued through the LSCI.

GeneGo, Inc.
— GeneGo is a private firm that works in what is known as the "post-genome
bioinformatics and systems biology" field. That is, the company maintains a
database of models for human tissues and diseases to help researchers discover
previously unrecognizable ways that people acquire and suffer from certain
diseases and even new ways to treat those diseases. GeneGo, Inc., moved to New
Buffalo, Michigan (about one mile inside Michigan’s border) from its original
home in Portage, Indiana. According to The Detroit News, GeneGo moved to
Michigan after being promised a "$200,000 state grant and the possibility of
future funding" from state officials.

The initial state favor provided
to GeneGo appears to have come in the form of a very low-interest loan of
$210,000
[8] made by the MEDC through a private venture capital fund, known as
Sloan Enterprises, L.L.C. Sloan is the recipient of $843,000 awarded through
the 2001 fiscal year LSCI grant process. The loan rate is 6 percent. According
to one Michigan venture capitalist, who asked to remain anonymous for fear of
MEDC retribution, this loan rate is about 24 percent less than most venture
capitalists demand for taking outrageously high risks. In other words, since
MEDC officials are not risking their own money, why charge a risk premium in
exchange for loaning money to ventures with a high likelihood of failure?
Governments have an overall poor record of picking winners and losers in the
marketplace. Governments should not be making such investment decisions. If
venture capitalists won’t voluntarily risk their own money for a 30 percent
return on investment, Michigan citizens should not have to watch their tobacco
settlement dollars placed at risk for a 6 percent return.

How have venture capitalists been
responding to today’s investment environment? They have been retreating.
According to Thomson Venture Economics and the National Venture Capital
Association, the venture capital industry was able to raise $107.7 billion
dollars for investment in new industries and firms in the year 2000. In 2002 it
is on pace to raise just $7 billion, a 94 percent drop in less than two years.
Yet during this same time, the MEDC has overseen a dramatic and direct increase
in investments in firms that venture capital investors are avoiding with good
reason. The National Association of Securities Dealers’ Automated Quotation
Biotech Index, which measures the performance of a basket of publicly traded
biotech companies, has declined from a high of 1,600 in 2000 to 400 in 2002, a
drop of 75 percent — and a much larger percentage drop than the Dow Jones
Industrial Average or the S&P 500 over the same time period.

State officials might respond by
saying, "Well, we are not investing taxpayer’s money, it is tobacco settlement
money." That’s correct, but it is important to remember that everything has a
cost, even if it is just an opportunity cost. If we direct tobacco settlement
money to high-risk industrial policy we have to find other money to fund the
core, but unglamorous needs of the state, such as road improvements and police.
Savings from eliminating this program should be redirected to the General
Fund/General Purpose component of the state budget. Savings: $15,000,000. Governor
Granholm’s 2005 proposal leaves this appropriation unchanged over the previous
year’s budget.